Senators far apart on Social Security

Grassley: 'Not very close' to drafting legislation

By

WilliamL. Watts

WASHINGTON (MarketWatch) - A series of hearings on Social Security's long-term financing woes has failed to produce much consensus on how to go about fixing the entitlement program, Senate Finance Committee Chairman Chuck Grassley acknowledged Wednesday.

Asked how close the panel was to drafting legislation, Grassley replied: "Not very close, I'm sorry to say. We've not had much progress in the meetings we've had so far."

Grassley, speaking to reporters after a committee hearing that focused on Social Security's solvency, charged that Democrats have done little but criticize proposals by President Bush and other Republicans while failing to offer a plan of their own, despite bipartisan agreement that the system faces serious long-term problems.

Sen. Max Baucus of Montana, the panel's senior Democrat, later told reporters that the key obstacle remains Bush's call to let workers divert a chunk of their Social Security payroll taxes into private investment accounts - a measure that by itself requires heavy government borrowing and hastens the day when Social Security becomes insolvent.

"The linchpin here is the president's private accounts," Baucus said. "Once they're off the table then I think there will then be a huge, or significant, groundswell" of proposals.

The president has continued to emphasize a role for private accounts created out of payroll taxes in public statements on his Social Security plan. Backers of the Bush proposal contend that the accounts could be used to help offset the impact of future benefit cuts that will be required to actually bring the system into balance.

Critics contend that the accounts will inject significant risk into a program that has long been a safety net for the nation's elderly. Democrats have also attacked Bush's endorsement of a proposal that would tie the method for determining middle- and higher-income retirees' initial benefit level to prices rather than wages, as is currently the case.

Under current law, a retiree's initial level of benefits is set according to a formula that multiplies average lifetime earnings by a wage-based index. The proposed change would likely reduce Social Security's long-term funding gap because prices have risen by around 1.1 percentage points less than wages.

Congressional Budget Office Director Douglas Holtz-Eakin, in testimony before the Senate panel, presented an analysis of a number of proposed benefit reductions, including tying all initial benefits to prices, and proposals that would partially index benefits according to prices.

Tax gap

The panel also heard pleas from a Treasury Department official and the top staffer on the House-Senate Joint Committee on Taxation urging lawmakers to eliminate loopholes that they said have allowed small business owners to shield earnings from Social Security and other payroll taxes.

J. Russell George, the Treasury's inspector general for tax administration, said a growing number of small business owners are incorporating their businesses under subchapter S of the Internal Revenue Code.

"S" corporation status exempts profits from corporate taxation and allows profits to pass through to shareholders, who are then responsible for paying individual income taxes, but not employment taxes, on the profits they received. Shareholders who run the business are subject to employment taxes, including the Social Security payroll tax, on compensation they received for their services.

In the 2000 tax year, nearly 80% of all "S" corporations were fully- or more than half-owned by a single shareholder. In such cases, the business owner determines his own salary, George said. A lower salary means lower employment taxes and higher profits, he said. Sole proprietorships, meanwhile, give business owners much less leeway to avoid employment taxes.

"The different tax treatment has caused the 'S' corporation form of ownership to become a multibillion dollar employment tax loophole for single-shareholder businesses," George said.

In the 2000 tax year, the owners of 36,000 single-shareholder 'S' corporations received no salaries at all despite each having operating profits of more than $100,000, he said. As a result, there were no employment taxes paid on $13.2 billion in profits, George said.

George K. Yin, the Joint Committee on Taxation chief of staff, urged the panel to consider proposals to close employment tax loopholes before moving to raise the 12.4% payroll tax rate or boost the cap on earnings subject to the payroll tax.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.